Notes From Underground: Let’s Make Sense of Bernanke Making Cents

Last Thursday, former Fed Chairman ” surprised” the investing public and announced he was adding a second quiver to his “bagged trophies” and taking on a consultancy with PIMCO to complement his other consultancy with Citadel. Mr. Bernanke claims he can work for investment funds because it does not conflict with his previous role as the key supervisor of too big to fail banks. The former chairman is an active blogger but I assume his blogging will cease when he becomes active with his new employers. Yet on April 30, Ben wrote a post on the WSJ’s Editorial Page Watch. The BLOG was criticizing the WSJ for its editorial, “The Slow-Growth Fed.” In the BLOG Bernanke takes the WSJ editorial board to task for criticizing the Bernanke Fed for overdoing QE and its failure to stimulate GDP. Bernanke takes cover by arguing that the WSJ has been wrong in its forecasting because it has argued on its op-ed pages that the FED’s QE policies were going to cause a “… breakout in inflation and a collapse in the dollar since 2006….”

Bernanke admits that the Fed may have missed its GDP targets but it was extremely successful in bringing down unemployment through its monetary policy actions. Notice to Bernanke: Investors do not depend on the WSJ being accurate forecasters whereas the U.S. and global economies are very dependent on the FED‘s ability to get the policy mix somewhat accurate. In my opinion, it is beneath the dignity of the former Fed Chair to openly criticize a newspaper for its failure in economic forecasting.

But criticism aside, Mr. Bernanke may have revealed in his BLOG what may, in fact, stimulate the FED to raise rates. In the final paragraph Ben Bernanke wrote: “I agree that monetary policy is no panacea, and as FED chairman I frequently said so. With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times. But the right inference is not that we should stop using monetary policy, but rather that we should bring to bear other policy tools as well. I am waiting for the WSJ to argue for a well-structured program of public infrastructure development which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn’t be giving up on monetary policy, which for the past few years has been pretty much THE ONLY GAME IN TOWN as far as economic policy goes.”

Bernanke calls for greater use of fiscal policy to promote greater growth. The new Pimco analyst seems to be suggesting that the FED can tighten monetary policy when politicians actually put forward a genuine fiscal stimulus program, which would put greater pressure on creating jobs, tightening the labor market and increasing wages. So it seems that it is Congress who will provide the necessary fuel to push the economy to a higher growth path. Until then it seems that the FED will pursue its present path and keep the monetary spigot at full throttle. As this is the third year of the Presidential election cycle it will behoove the Republican Congress to enact a fiscal stimulus for as Nixon made clear to all the Washington politicians, “When it comes to being re-elected we are all Keynesians.” Any hint at an infrastructure program from Congress will greenlight the Fed to raise rates. If I am correct in my hypothesis stocks such as FLUOR and other construction firms should out perform the market. Ben may have actually shed some light in an effort to justify the actions of his beloved portfolio balance channel.

***Tonight the Reserve Bank of Australia announces its newest interest rate decision. The RBA‘s Governor is expected to CUT RATES by 25 basis points to 2.0% from 2.25%. The Aussie dollar has been strong for the last two weeks as it has rallied against the U.S. dollar and Japanese yen and even the KIWI. It is important to read Governor Glenn Stevens’s rationale for cutting rates. Mr. Stevens is a respected watcher of the global financial scene so his views on Chinese economic growth may be used as a the catalyst for a rate cut. If China’s growth is deemed a problem look for softness in industrial commodities and be patient to see if the Aussie dollar rallies upon the highly expected RBA action. More importantly, find support levels of technical significance to find low risk buying opportunities in case investors starved for YIELD buy the AUSSIE DOLLAR to procure higher interest rates.

Yra- I don’t get his criticism. This is the same Bernanke who allowed some of the large banks to bamboozle the world investment community with CDOs and other garbage, kept interest rates too low for too long (thereby promoting the bubble), and totally missed intervening in the mortgage crisis/financial meltdown in time.

Bernanke, more than any other person, was the cause of the financial crisis.